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WHAT IS A RISK MANAGER to make of transactions last week in which groups of insurers are acquiring stakes in two major insurance brokers?

The answer to that depends on the extent to which the parties involved allay any concerns raised by risk managers who are not already clients of both the brokers and their insurer investors. The key to that will be open and frank discussions with risk managers about what the investments represent and what they bring to the table.

As we report in this week's issue, a group of five insurers is seeking a 19% stake in Willis Corroon Group P.L.C. as part of a proposed takeover of the company by Kohlberg Kravis Roberts & Co. L.P. Also last week, broker USI Insurance Services Inc. has reconstituted its ownership, selling more than 50% of its shares to five insurers and a bank.

In addition to those two deals, EXEL Ltd. earlier this month acquired a 25% stake in surplus lines broker Tri-City Brokerage Inc.

Those transactions certainly are good news for the brokers, giving them considerable new capital with which to make acquisitions and enhance services, while also promoting strong ties with leading insurers. The deals also appear to be good for the insurers, providing them with assured distribution outlets for their products in this competitive market.

Looked at in that light, they might also be very good deals for commercial insurance buyers by bringing new resources and insurance expertise to their brokers.

However, as we have seen in recent months, risk managers around the world are concerned about potential conflicts of interest in broker relationships with insurers. This concern is fueled by the fact that brokerage consolidation has resulted in a few megabrokers that have the potential to wield greater influence over how risks are placed.

The biggest controversy to date has centered on contingent commissions, which are paid by insurers to many brokers based on the volume or profitability of their business.

Risk managers who debated the issue during the Risk & Insurance Management Society Inc.'s annual conference earlier this year clearly were concerned that contingent commissions could compromise a broker who should be searching for the best deal for policyholders (BI, May 11).

Although many brokers have emphasized that the commissions are valid sources of compensation and do not influence the best placement of a client's risk, they are very aware that it is a sore subject for buyers.

The companies involved in last week's transactions, therefore, cannot ignore that any ownership of a broker by insurers will come under increased risk manager scrutiny.

The brokers and insurers must make an extra effort to assuage any concerns of risk managers. First and foremost, the brokers and insurers need to discuss with clients their reasons behind the investments.

If the purpose is to support alternatives to the megabrokers, which will ensure the survival of a more competitive and vibrant brokerage community, then that is likely to be welcomed by buyers. Similar goals were cited by American International Group Inc. in 1994, when it made a $200 million investment in Alexander & Alexander Services Inc. Both AIG and A&A took pains to assure clients that no favoritism would be shown to the investor.

But if the intent is to give buyers less choice over where their business is placed, risk managers certainly won't welcome that.

It is too soon to say what the investments in Tri-City, USI and Willis will mean for buyers, or whether this signals a new trend toward insurer ownership of insurance brokers.

But it is not too early for brokers and insurers to engage in a dialogue with their customers about where they fit in this new equation and to discuss how it will benefit not only the brokers' shareholders but also their policyholders.